Compliance Today (January 2020)
On November 18, 2019, MIT Sloan School of Management announced in a press release, “Evidence points towards yes, according to new research that offers the first large sample study on how rules and ethics training affects behavior and employment decisions in the financial sector.”
The authors of the research paper titled, Can Ethics be Taught? Evidence from Securities Exams and Investment Adviser Misconduct are Andrew G. Sutherland, Associate Professor of Accounting at the MIT Sloan School of Management; Zach Kowaleski, Assistant Professor of Accounting at the University of Notre Dame's Mendoza College of Business; and Felix Vetter, a PhD candidate at the London School of Economics.
According to the announcement, “The researchers studied nearly 1.2 million investment advisers and financial representatives working at U.S. broker-dealers between 2007 and 2017, with a focus on the consequences of a 2010 change in the investment adviser qualification exam. That year, questions from the rules and ethics section were reallocated to the technical material section. The rules and ethics section covers allowable forms of compensation, disclosure requirements, and prohibitions of unethical business practices while the technical section covers such topics as capital market theory, investment vehicle characteristics, ratios, and financial reporting. Prior to the change, rules and ethics questions received an 80% weight, whereas after their weight was just 50%.
“The authors' analysis effectively compares individuals who took different versions of the exam but are otherwise similar in terms of their current employer, location, qualifications, and experience.
“Their main finding is that those passing the older exam, with more rules and ethics coverage, were one-fourth less likely to commit misconduct. A similar pattern appears for egregious misconduct—incidents involving fraud, theft, or deception—indicating the exam alters individuals' perception of acceptable conduct (i.e., ethics) and not just their awareness of specific rules.
“In terms of individual characteristics, they found the behavior of the least experienced advisers is most sensitive to the extent of rules and ethics testing. These results are consistent with the exam playing a "priming" role, where early exposure to rules and ethics material prepares the individual to behave appropriately later. Those passing the exam without prior misconduct appear to respond most to the amount of rules and ethics material covered on their exam. Those already engaging in misconduct, or having spent several years working in the securities industry, respond least or not at all.”
The announcement notes, “The exam is administered by the Financial Industry Regulatory Authority (FINRA) and designed by the North American Securities Administrators Association (NASAA).”
To access the research paper, Can Ethics be Taught? Evidence from Securities Exams and Investment Adviser Misconduct, please visit: https://bit.ly/2rYKDjf
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